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Whenever we look for a safer investment option, focus shifts to mutual fund because it keeps mobilizing the investment across different securities such as stocks, bonds, money market instruments to minimise the risk element. It gives you the higher returns of equity and at the same time assures safety with regular flow of income through debt instruments. In a nutshell, one can say mutual fund is a great mean to diversify the risk that remains with any financial instrument. Mutual funds can be classified into equity funds and debt funds. Equity funds invest predominantly in equity and equity related products, while debt funds pool the money across debt instruments such as bonds, debentures, etc. Investors always keep a close eye on the equity mutual funds as they have offered returns in the range of 10%-20% in the 10-year period.
Large cap equity funds
Large cap equity funds are the type of mutual funds that aim to appreciate capital by investing mainly in stocks of large blue chip companies. Fund houses keep a separate criteria for the classification of companies as large cap, small cap or mid cap. Companies having a large market capitalisation are called as large cap companies, which include Infosys, TCS, ONGC, HDFC Bank, SBI, to name a few. The reason why investing in these funds can be a prudent move is because of the fact that the volatility here is much lower compared to small and mid cap funds. And with less volatility, you can correctly estimate the prospects of large cap funds and decide on your portfolio. Even though the returns are lower than mid or small cap funds, large cap funds are still the best in terms of safe returns. And if you look to start off your mutual fund journey on a bright note, make sure you invest in large cap funds to reap higher returns and get the enhanced safety of your investment.
Diversified Equity Funds
As they say, don’t put all your eggs in the one nest. So, you can choose the option of diversified equity funds, which put your investment across large, small and mid cap stocks as well as different sectors of the economy. The investments are diversified in such a way that the risks get minimised to a great extent. With the reduced risk and greater diversification, you can get compensated for the loss of returns from one security with the gain in others. These equity funds offer you reasonably higher returns at reduced risk.
Hybrid Equity Oriented Funds
Hybrid equity oriented mutual funds, which are preferred mostly by both risk-savvy and risk-averse investors, allocate almost 65% of the investment in stocks and the remaining in debt instruments. Considered as less risky than large, small and mid cap funds, hybrid funds provide a perfect mean for investors who have a moderate risk taking appetite. These funds disperse your investment around the securities depending upon the movement in equity and debt markets.
Equity Linked Saving Scheme
Equity Linked Saving Scheme (ELSS) puts majority of the investment in equity and equity related products. ELSS comes up with a lock-in period of 3 years and offers tax exemption under Section 80C of the Income Tax Act for upto Rs 1,50,000. ELSS is specially designed for investors with a high-risk profile as returns from the instrument fluctuate based on the volatility in stock market.
Thematic or sector funds
Equity mutual funds that make investment in a particular industry or sector of the economy are called as thematic or sector funds. These funds invest in sectors like banking, power, healthcare, aviation, automobile, among others. However, these funds carry risk as the scope for diversification is very limited ot not there.
After looking at several equity mutual funds based on the risk-return approach, the need isfor a long-term investment if you want to gain the most. With a long-term approach, investors with varied risk profiles will find these funds appealing. To start with, you should keep your focus on balanced funds or ELSS. As you get older in your mutual fund journey with the passage of time, start investing in large cap and diversified equity funds to receive higher returns.